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Phase 1 trade deal signed

By Staff | Jan 24, 2020

With the final USDA report of the crop year behind us, the market will move into a doldrums period for the next 60 days. However, the USDA announced that farmers will be resurveyed in the states that had the most unharvested acres which include: North Dakota, South Dakota, Minnesota, Michigan and Wisconsin. The unharvested bushels were counted as farm-stored grain and a comparable yield from fields harvested in the area were used for measurement purposes. Even with the USDA stating they’ll resurvey these areas, there’s also some doubt placed that the numbers would be adjusted. Going forward the market will start looking at 2020 planting intentions and potential ending stocks from trend-line yields.

ADM announced it’s working on negotiations with less than five potential purchasers or joint venture partners for their three dry mill ethanol plants. In 2016, ADM tried selling their dry mills but later took them off the market due to no potential buyers. ADM has played a large roll in ethanol production in the U.S. even before farmer-owned and cooperative ethanol plants started up in the Upper Midwest. ADM’s announcement comes a week after another industry giant, Bunge North America, sold its stake in Southwest Iowa Renewable Energy in Council Bluffs, Iowa and is exiting the ethanol production industry. ADM used to be the largest U.S. ethanol producer; producing 1.7 billion gallons of ethanol per year until POET took the lead when they started producing 2 billion gallons of ethanol a year. In mid-2019, POET announced they’d idle or reduce production at 28 of their bio refineries in seven states. With many of the larger players exiting or reducing ethanol production and the estimated demand decrease on consumption and the Small Refinery Exemptions being granted, it has many wondering about the financial state of the U.S. ethanol industry.

The finalization of long awaited Phase 1 agreement lead to a selloff in the soybean complex on Wednesday as traders didn’t get the clarification they were hoping for. China committed over two years to purchasing at least an additional $200 billion on manufactured goods, agriculture, energy and services from the U.S.

The agreement stated that ag sales to China are to increase over the baseline, by $12.5 billion for 2020 and $19.5 billion in 2021. The baseline is thought to be the $24 billion that was recorded in 2017 but it wasn’t specifically named. This would put average purchases over the two years at the $40 billion previously mentioned. There was also no clarification of which specific ag products or the volume.

Traders are skeptic due to verbiage within the deal that leaves the possibility for China to not comply with all terms. Statements from Chinese Vice Premier Liu He, that Chinese companies will import U.S. goods based on their needs and market conditions also sent a negative sentiment through the market. It is said the $250 billion tariffs on Chinese goods will remain in place until an agreement is reached on Phase 2. U.S. Vice President Pence stated discussions have already begun on the Phase 2 agreement. Even with the agreement signed and in place, traders will be watching closely for fresh Chinese purchases.

The Senate approved the U.S.-Mexico-Canada trade agreement last Thursday. The vote passed 89-10 in favor, the bill will now be sent to President Trump to be signed into law. Mexico has already passed the law, and now Canada will need pass the bill in order for it to go into effect. Canada’s House of Commons is expected to vote on a deal within the next few weeks.

For more information, you may contact Kristi Guse at (712)-260-6486, or e-mail at kguse@maxyieldgrain.com. The opinions and views expressed in this commentary are solely those of Kristi Guse. Data used in writing this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position. Please visit our Risk Disclosure Page for more information on commodity trading.

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